Orlando v. Nxt-ID, Inc.

Background

Michael Orlando and other stockholders of Fit Pay, Inc. sued Nxt-ID, Inc., Garmin International, Inc., and CrowdOut Capital, LLC. Orlando acted as the stockholders’ contractually designated shareholder representative. Under a merger agreement, the stockholders sold Fit Pay to Nxt-ID and were to receive an earnout payment equal to 12.5% of revenue generated by Fit Pay technology from October 1, 2017, through September 30, 2021.

Nxt-ID later borrowed money from CrowdOut under a loan agreement that required Nxt-ID to sell Fit Pay. Garmin then agreed to purchase all of Fit Pay’s stock from Nxt-ID. The stock purchase agreement stated that Garmin had no obligation to make earnout payments or provide related sales and revenue reports. After the sale, Nxt-ID used most of the sale proceeds to repay CrowdOut. The plaintiffs alleged that no defendant paid the earnout amounts they believed were owed. The opinion notes that claims concerning whether Nxt-ID breached the merger agreement were the subject of separate motion practice.

Garmin’s Motion

Garmin moved to dismiss under Rule 12(b)(2) for lack of personal jurisdiction. Personal jurisdiction is a court’s authority to require a particular defendant to defend a case in that court. The plaintiffs argued that Garmin had sufficient contacts with New York for the court to exercise specific jurisdiction over their claims for tortious interference with the merger agreement and unjust enrichment.

The court concluded that the plaintiffs had not adequately alleged specific jurisdiction. The plaintiffs did not argue that Garmin was subject to general jurisdiction in New York, and their counsel conceded that point at oral argument. The court also found that the plaintiffs had not shown a sufficient connection between Garmin’s New York activities and the claims. Although the plaintiffs alleged that Garmin sold and advertised products in New York, held meetings there with Fit Pay representatives, and hired a New York-based attorney for due diligence, the court found that the complaint did not allege that the attorney committed a tort in New York or negotiated the stock purchase agreement. Hiring a New York attorney to conduct due diligence, without more, was insufficient.

The court therefore granted Garmin’s motion to dismiss under Rule 12(b)(2). Because it found no personal jurisdiction over Garmin, it did not reach the merits of the plaintiffs’ tortious-interference and unjust-enrichment claims against Garmin. The court also noted that it had previously warned the plaintiffs that they would not receive another opportunity to amend the pleading to correct this deficiency.

CrowdOut’s Motion

The plaintiffs asserted conversion and unjust enrichment against CrowdOut. Conversion of money generally requires a specific, identifiable fund that was designated for a particular purpose, used for an unauthorized purpose, and owned, possessed, or controlled by the plaintiff before the alleged conversion.

The court held that the plaintiffs failed to state a conversion claim. They alleged only that the earnout payments exceeded the $2,183,265 that Nxt-ID paid CrowdOut to repay the loan. The complaint did not identify a specific fund designated for earnout payments. The plaintiffs alleged that Nxt-ID was struggling financially and used the Fit Pay sale proceeds to pay CrowdOut, but they did not provide non-conclusory allegations that the proceeds were legally reserved for the plaintiffs. The court also found that the plaintiffs alleged only a contractual right to earnout payments, not ownership, possession, or control of the money. The court dismissed the conversion claim.

The court also dismissed the unjust-enrichment claim. Under the court’s stated New York law principles, unjust enrichment requires an enrichment at the plaintiff’s expense and circumstances in which fairness requires repayment. The court ruled that the merger agreement governed the dispute over whether Nxt-ID owed the plaintiffs the money paid to CrowdOut, even though CrowdOut was not a party to that agreement. It also concluded that it was not unfair for CrowdOut to collect on the loan it had made to Nxt-ID.

Disposition

Judge Mary Kay Vyskocil granted Garmin’s and CrowdOut’s motions to dismiss. The opinion states that the claims against Garmin were dismissed for lack of personal jurisdiction and that the conversion and unjust-enrichment claims against CrowdOut were dismissed for failure to state a claim. It does not state that these dismissals were with or without prejudice.